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Exchange Rate Choices of Microstates

Patrick Imam

No 2010/012, IMF Working Papers from International Monetary Fund

Abstract: In this paper we first explain why most microstates (countries with less than 2 million inhabitants) have gained independence only in the last 30 years. Despite the higher costs and risks microstates face, their ability to better accommodate local preferences combined with a more integrated world economy probably explains why the benefits of independence have risen. We explain why microstates at independence have chosen either dollarization, currency board arrangements, or fixed exchange rates rather than more flexible forms of exchange rate systems. We then, using the Geweke-Hajvassiliou-Keane multivariate normal simulator, model empirically the determinants of each of the different fixed exchange rate regimes in microstates and analyze the policy implications.

Keywords: WP; U.S. dollar; pound sterling; monetary policy; central bank; foreign currency; Micro-states; Dollarization; Currency board; Fixed exchange rate; Geweke- Hajivassiliou-Keane Multivariate Simulator; UK pound; managed float; regime choice; New Zealand dollar; small country; U.K. government; Conventional peg; Currencies; Exchange rate arrangements; Exchange rates; Currency boards; Caribbean (search for similar items in EconPapers)
Pages: 48
Date: 2010-01-01
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